I am still fairly young, breathing, and relatively good looking* and like to save up for retirement so they can unthaw a cryogenic Robin Leach do a “Lifestyles of the Rich and Famous” on me in about 20 years. It’ll be pretty sweet. . . I daydream of my little ranch in the Southwest with a couple of old trucks and a whiskey still. But that’s neither here nor there.
I contribute at work to a 401(k), and this year am looking to save up to contribute to an IRA I’ve got. According to an IRS Website, I can contribute $5,500 to the IRAs. . . I think total across all the IRAs I might have (could be 2, could be 12–limited to $5.5k).
But does that affect how much I can throw into a 401(k)? Does the 401(k) affect how much I can throw into the IRAs?
Tripler
I’ll be back later. I have to check between the sofa cushions for loose change.
If you are covered by a 401k, a pre-tax IRA contribution is not possible. Post-tax money, can be contibuted to an IRA or ideally, a Roth IRA (if you meet the income limits).
If you exceed the Roth maximum salary, look into a ‘backdoor’ Roth contribution. This requires that you convert (and pay taxes on any conventional IRA you have).
Unlike 401k and conventional IRAs, Roth IRAs are never taxed when you withdraw the money in retirement.
Yes, do consider a Roth, for flexibility if for no other reason.
Additionally, you will be hit with heavy penalties if you withdraw from a traditional IRA or 401k before retirement. With a Roth, the penalties only apply to earnings, you can touch your principal if you really want to.
A 401(k) only affects the rules for IRAs insomuch that they are an employer retirement plan. They are completely separate other than that. How much of your income you elect to defer for the 401(k) does not affect how much you can contribute to an IRA.
If you make a backdoor Roth conversion, ie, a conversion of a nondeductible (ie, post-tax) IRA contribution, you need to convert all of your IRAs, requiring you to pay tax on any amounts that were contributed pre-tax (ie, you took a deduction for) to the IRA. That’s not actually 100% true - the “basis” (amount of post-tax contributions made) is allocated pro-rata if you don’t rollover all your IRAs, but that’s usually not something anyone wants to worry about, and saying you “need” to roll over all of them is easier than describing what actually happens.
The folks above have covered the situation completely for someone who earns money only as an employee with a fairly ordinary level of income.
Here’s an intro to the next level:
The general term for the rules on contributions to tax-advantaged retirement plans is “415 limits” because they’re all set out in section 415 of the IRS regulations.
So a quick google for [2017 IRS 415 limits] will get you a host of sites with answers, including IRS official info. Next year’s limits are normally released in mid October.
Section 415 contains a few other limits that may matter if someone has self-employment income. SAR, SEP-IRA, Keogh, etc. There are also limits on total deferred compensation, company matching, and some other BS that may matter if one makes at least a couple hundred K a year.
The tax code: it’s harder than we understand. It may be harder than we *can *understand.
